Governments Unable to Keep Pace with 'Dash for Shale Gas'

Business need certainty to make substantial investments in new forms of energy, but governments like the UK seem confused about the way forward – says think-tank

Next month, the coalition government in Britain intends to publish its new energy bill. The coalition partners, however, are increasingly at odds over the direction of the United Kingdom's energy policy. In view of growing antagonism, it remains unclear whether the bill can be salvaged or whether the increasing friction will lead to its delay.

Last week, British Prime Minister David Cameron bewildered MPs when he announced that energy suppliers would be forced by law to put customers on their cheapest energy tariffs. Ed Davey, the Energy Secretary, contradicted the PM declaring that the government's new energy legislation would actually introduce something quite different to bring down energy costs - increased market competition. No wonder that the government's approach to energy legislation appears increasingly confused and frenzied.

Energy policy is one of the main economic battle grounds between the government's coalition partners. On energy policy, the Treasury has been increasingly at odds with the Department of Energy and Climate Change. This conflict has been growing between the Treasury and DECC ever since Chancellor George Osborne promised an end to Britain's unilateral decarbonisation targets.

The Chancellor has sent a clear signal that the government's ambition to restore the UK economy to health is overriding its desire to be the greenest government. He is adamant that the UK should no longer place too much emphasis on renewable energy and should adopt a new dash for gas. Cameron's recent reshuffle has certainly helped to pave the way for a new gas policy while Owen Paterson, the new Environment Secretary, has been widely reported to favour the rapid exploitation of shale gas. Yet, Davey is trying hard to safeguard the future of renewable energy subsidies.

In July, Osborne wrote to Ed Davey warning him that renewable energy was too expensive and that Britain should advance gas-fired electricity generation instead. Osborne stressed that the government "need to set out an approach which puts costs to consumers at the heart - we should be limiting support for low-carbon generation to a level the country can afford".

The DECC, on the other hand, has based the case for expanding green – and more expensive – energy in large part on their assumption that gas prices will inescapably rise in the future. This argument is no longer credible in the light of the growing international abundance of shale gas, not to mention the likely shale gas potential in Britain itself.

It will be interesting to see whether the coalition government will be able to overcome these conflicting and contradictory policy approaches in coming weeks. Davey claims the ultimate intention of the energy bill, expected to be published in November, was to "move from price setting by ministers to price discover by market". However, the draft energy bill - released earlier this year - was just as confused and inconsistent as Cameron's latest intervention. Unless these incongruities are disentangled and resolved, the energy bill will not provide investors with the certainty they require to make substantial investments.

This lack of clarity would inevitably lead to constant government amendments and continual intervention, further bewildering the energy sector. It is doubtful that an energy bill fudge would actually be workable, let alone economically viable. There is a growing risk that it will prove to be highly unpopular as the costs of these measures are likely to further inflate energy bills artificially. In this case, the crisis of energy policy making could quickly turn into a veritable government fiasco.

Benny Peiser is the director of the Global Warming Policy Foundation think-tank, in the United Kingdom